Harvard’s Michael Porter Shares His Economic Outlook

Harvard Business School professor Michael Porter is a familiar name to almost anyone who has graduated from business school in the last twenty years or so. He recently gave an interview on CNBC in which he shares his analysis of the U.S. economy. Porter is best known for his work in competitive strategy, a field in which he is considered the preeminent expert, so his views of what ails the U.S. economy and how we can get back on track are of considerable interest. He has analyzed the forces that provide one country or region with relative competitive advantages vs. others and he applies this perspective in his commentary.

His position is that the United States used to be a leading global competitor, but we have fallen behind much of the rest of the world due to the burdensome nature of the corporate tax code, aging infrastructure, and a workforce that is poorly prepared for current needs. He also believes that entitlement programs such as Medicare are creating an enormous long-term economic drag that will make it hard for America to compete effectively with other nations.

Porter is especially concerned about the decline of the American middle class and highlights stagnant household incomes as an important issue. He believes that the middle class is ‘hollowing out,’ which will result in a small upper class and a massive population of poor workers. He believes that we are seeing declining social and economic mobility that has historically allowed motivated poor and working-class Americans to improve their lot. He states that America is simply not able to create well-paying middle-class jobs the way that we have in the past fifty to sixty years. The primary factors limiting job creation are global competition and a skills gap for workers.

So, what does Porter see as the solution? First, he states that we need to reduce the burden of entitlement programs and identifies healthcare costs as the primary problem. Without reducing healthcare costs, he believes all other budget reforms will amount to little. Second, he believes that we need to radically simplify the corporate tax code and reduce legal and regulatory burdens on U.S.-based firms. Finally, he believes that we need to aggressively pursue energy independence and capitalize on the enormous reserves of natural gas in the U.S.

I was surprised that Porter did not choose improved public education and skill development as one of the best ways to fix our economic woes, given that he explicitly identified the skills gap as a major problem for U.S. workers. Social mobility and high labor participation rates both depend on people having the ability to improve their stock of human capital and thereby move up the economic ladder.

I was also surprised that Porter did not elaborate on the problem of stagnant or falling incomes, even though he identified this as a major problem. If the U.S. is directly competing with workers in other countries who have comparable or higher skills, lower wages, or who do not have the added costs of ensuring a safe workplace, where does this leave us? The scenario that Porter describes points towards a long-term decline in the U.S. middle class unless we see some type of heroic education reform.

The future described by Porter and the implications for U.S. workers and investors are straightforward. First, U.S. workers need to develop high-value skill sets. Lower-skill manufacturing jobs are simply never coming back unless wages collapse to a level comparable to the cheapest global alternative. Second, we are simply not going to see the kind of economic growth for the U.S. that characterized the decades after World War II. This, in turn, means investments in firms that cater to discretionary income will not thrive. Housing prices will likely stagnate or fall because workers with stagnant or falling incomes are less likely to be able to purchase houses. These outcomes all point towards the U.S. looking a lot more like a second-world nation, so it is interesting that Porter also predicts that energy production will be the best hope for economic growth. The most developed economies tend to depend less on commodity production and more on technology as the basis for economic growth. A shift back towards a commodity-based economy is consistent with an overall decline in the middle class, as compared with global competitors.

Is Porter’s outlook likely? Personally, I think that it is pretty clear that the issues that he raises are real and significant. We are a very wealthy and productive nation, but we waste an awful lot of that wealth. Our spending on healthcare as a fraction of GDP is much higher than other developed countries and we have worse outcomes. We know that we need major reforms but we consistently elect representatives who seem unwilling to work together to solve the big problems. Porter also notes that a lot of the problem is attitude. He comments that “being American doesn’t guarantee a high wage.” Until we improve the skills of average workers, we are likely to see continued stagnation or decline in median household income. Given that a large fraction of the U.S. economy is based on discretionary spending, declining real incomes will further suppress economic growth.

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